NBCC: New order inflow to boost profit

Robust business model, healthy order traction hold firm in good stead

At a time when many infrastructure companies are grappling with inconsistent order inflows and pricing wars in the bidding process, NBCC stands out. Despite an order book of Rs 37,000 crore giving it earnings visibility for the next six years, NBCC continues to receive fresh orders.

The central government cleared seven redevelopment orders on Wednesday, with three orders worth Rs 14,000-15,000 crore in total allotted to NBCC. These orders pertain to project management business, which accounts for 80 per cent of its revenues. Following the order news, NBCC’s stock price was up over 10 per cent on Thursday over the previous close.

The company appears well on track to achieve its 30 per cent revenue growth and 25 per cent net profit growth forecast over four to five years. Rohit Natarajan of IDBI Capital expects NBCC’s order book to touch Rs 1,00,000 crore by FY20, translating to 25 per cent compound annual growth in order inflows.

NBCC is a state-owned entity. In the project management division for NBCC, most redevelopment projects are self-financed through sale of commercial built-up areas. This enables NBCC to maintain an asset-light balance sheet.

Also, as these projects include operation and maintenance (O&M) opportunities spanning 30 years, it provides long-term earnings. O&M accounts for 15 per cent of the total contract cost, with a chargeability of cost plus 20 per cent margin, helping sustain the overall operating profit margins at 10 per cent. That apart, there is absence of visible competition. NBCC receives orders on nomination basis and is shielded from price war private players face.

But it may become vulnerable to vagaries in the real estate market. However, given its cash profile (Rs 1,133 crore as on March 31) and stable clientele, the strategy should work well . Nevertheless, real estate is only five per cent of revenues.

All these have helped NBCC post good return on equity; in FY16, the same stood at 22 per cent, which according to analysts at Edelweiss could improve to 26 per cent in FY17. It is for these reasons the brokerage terms NBCC as a ‘worthwhile bet’. While consensus target price, by Bloomberg, is Rs 229, it is likely to be revised upwards.